(Bloomberg) -- Goldman Sachs Asset Management and Pacific Investment Management say Treasuries are poised to fall as the Federal Reserve approaches the end of its bond- buying stimulus program.
The completion of the Feds quantitative easing plan may add interest-rate risk to U.S. debt, paving the way for possible declines in Treasuries, said Philip Moffitt, head of fixed income for Asia and the Pacific at Goldman Sachs Asset in Sydney. Investors will demand a concession to buy longer-dated debt as the Fed withdraws from a market where it bought 41% of this years gross issuance of Treasuries due in more than 20 years, Pimco said in a report.
Effectively duration is being added into the market each month as the Feds bond purchases come to an end, Moffitt said today in a Bloomberg Television interview. Theres not been enough concentration on what that addition of duration means to the supply and demand balance in the market and we actually think thats likely to have as big an impact as anything else.
HIGHER YIELDS
Goldman Sachs Asset sees benchmark Treasury yields increasing to around 4% by the end of next year, Moffitt said in an interview with John Dawson on Bloomberg Televisions On the Move.
Steve Rodosky, a portfolio manager at Pimco, said in a report published on the companys website that an improving U.S. economy will help send yields on the longest-dated securities moderately higher in the near term, while expecting them to find support around current levels in the long term.
The Fed will publish the minutes of its Sept. 16-17 meeting tomorrow. Policy makers raised their median estimate for the benchmark federal funds rate last month to 1.375% at the end of 2015, compared with a June forecast of 1.125%.
Officials also cut monthly bond purchases to $15 billion in a seventh consecutive $10 billion reduction, staying on course to end the program in October. They kept their pledge to maintain interest rates near zero for a considerable time after the asset buying stops.
FED VIEW
Weve gone a long way through QE tapering and we still havent seen much upward pressure on yields, said John Davies, a U.S. interest-rate strategist at Standard Chartered Bank in London. My suspicion is that it will be a more gradual increase over time in yields because even when the QE has finished, the forward guidance will remain very much in place. The 10-year rate will be at 2.75% at year-end, he said.
Treasuries have gained in the past month amid signs of slowing global growth, including data today that showed German industrial production declined in August the most since 2009.
An index of U.S. government debt due in 10 years or more has returned 1.8% in the past month, the best-performer among 144 bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
It will be unusual for the Fed to do a lot of tightening in a scenario where global growth is patchy, said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney. Treasury 10-year yields will probably end the year around 2.50%, particularly if U.S. data follows European and global data down.
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